British Pound faces selling pressure as UK inflation cools down at a faster pace

The British Pound come under pressure, following the UK inflation data release.
The UK headline CPI growth cooled down at a faster pace of 2.8% YoY vs. 3% estimates.
Investors await FOMC minutes, UK flash PMI and Retail Sales data.

Sagar Dua FXStreet

The British Pound (GBP) drops against its major currency peers, sliding to near 1.3375, during the European trading session on Wednesday. The British currency comes under pressure, following the release of the United Kingdom (UK) Consumer Price Index (CPI) data for April, which showed that inflationary pressures cooled down at a faster-than-expected pace.

The Office for National Statistics (ONS) has shown that the headline CPI grew by 2.8% Year-on-Year (YoY), slower than 3% estimates and March’s reading of 3.3%. In the same period, the core inflation – which excludes volatile components such as food, energy, alcohol and tobacco – dropped to 2.5% from the previous reading of 3.1%, while it was expected to arrive at 2.6%. Month-on-month (MoM) headline CPI rose steadily by 0.7%, slower than 0.9% estimates.

Signs of cooling UK price pressures would force traders to raise bets supporting Bank of England (BoE) interest rate cut bets in the near term.

Investors brace for more volatility in the British Pound in the remaining week, as the preliminary S&P Global Purchasing Managers’ Index (PMI) data for May and the Retail Sales are scheduled to be published on Thursday and Friday, respectively.

Meanwhile, the US Dollar holds onto over-a-week long rally due to increasing expectations that the Federal Reserve (Fed) will deliver at least one interest rate hike this year. As of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.1% higher to near 99.40.

Hawkish Fed prospects have accelerated due to elevated oil prices amid restricted energy flows through the Strait of Hormuz.

For more cues on the US interest rate outlook, investors will focus on Federal Open Market Committee (FOMC) minutes of the April policy meeting, which will be published at 18:00 GMT.

Economic Indicator

Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders?

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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